Wednesday, April 27, 2011

More on the Saudi's slash of oil output

Soon after we posted the piece on April 18 regarding the report from the Saudi Oil Minister, Ali al-Naimi, we discovered an article we'd clipped from the Oil & Gas Journal, sourced from the Oil & Gas Journal Online, dated March 28 (two days before the President's energy speech).  So, this March 28 article actually contained the news of the "output cut", which Mr. Naimi re-delivered on April 18.  The article quotes Barclays Capital managing director Paul Horsnell, and he paints a far different picture of the worldwide supply, demand and capacity issues than did Mr. Naimi:

"Saudi Arabia's production is estimated at 8.2 million b/d. [which is what Mr. Naimi said they had indeed produced in March, some four weeks later]  However, Horsnell said, recent data are pointing to Saudi output close to 9 million b/d in December and "and at that level in January and February." [Mr. Naimi confirmed the 9 million b/d, as to February]

"He said, "This has two main implications. First, it is the source of another downward revision of start-of-year spare capacity levels, since Saudi Arabia's output has been higher than was originally reported.  The second implication is in what it suggests to us about how much Saudi Arabia needs to produce to balance the market."

In other words, Mr. Horsnell is saying that since the world previously thought that the Saudi's were producing less in December than they actually were, then the estimated worldwide "buffer" production capacity was significantly less than believed, as well.  Also, his observation that the Saudi's evidently needed to produce at 9 million b/d in order to balance the market is the exact opposite of what Mr. Naimi said, four weeks later.

Mr. Horsnell went on to say:

"Even producing 9 million b/d, Saudi Arabia still has left "a significant deficit at the margin of the market with inventories falling faster than normal, even before Libyan exports came off the market.  Allowing for a normal second quarter global inventory build and replacing lost volumes from elsewhere seems likely to require Saudi Arabia to move up to 10 million b/d, in connection with higher volumes from the other holders of spare capacity ..."

This doesn't sound much like a market which is oversupplied ...

Earlier in the same article, with respect to demand, Mr. Horsnell said:

"Oil demand growth in 2010 earlier was estimated at 2.57 million b/d, with 2011 growth previously forecast at  1.56 million b/d.  Now 2010 demand growth is put at 2.83 million b/d-making it "the strongest year for global oil demand growth over the past 30 years."

This doesn't seem to jive with the drop in demand/oversupplied market to which Mr. Naimi referred ...

Tom Whipple, a former government analyst and current Peak Oil news aggregator came out soon after the Naimi announcement, outlining the oversupply scenario.  However, on April 25, Mr. Whipple supplied some alternate explanations for the Saudi cutback.  One of his explanation's revolved around the fact that Saudi oil production has finally reached the practical limits to its growth, and that the Saudi's could not sustain the 9+ million b/d rate comfortably.   Stuart Staniford, a PhD physicist and analyst of Saudi production, provided some interesting graphs on April 13.  Looking at one of those graphs in particular, what stands out is the substantial rate variation in the 2003-2011 period.  Of course, Saudi is the ultimate swing producer.  But with the exception of a period in 2005, it appears that rates never stay above 9 million b/d for very long; that is, even in face of high prices and a tight market the rates come down substantially, after a brief peak.  One might worry that the "maximum reservoir contact" (MRC) wells in Ghawar and elsewhere are tending to cone water after a short run at high rates, and that some wells might be threatening to water out if these high rates are sustained.  If this is the case, this would mean that the often touted "worldwide spare capacity" of 3 million b/d or so ... is just not there (as it derives primarily from the Saudi's).  In turn, if the Saudi's can't really sustain even 9 million b/d, then this would have serious implications for the world in that the next, more intense manifestations of Peak Oil may be nearer than we think.

(Mr. Whipple also offered an alternate explanation in terms of "the Saudi's making a political statement" in their cutting of production.  This theory would suggest that the Saudi's were upset with the flip-flops in US support for some of the other Arab regimes, and cut production as a result.  This might be, but in light of the prior, substantial fluctuations shown by Staniford, it seems that some production capacity-related explanation is a better fit.)

Monday, April 18, 2011

"Saudi's slash oil output" ... or did physics?

"The market is overbalanced ... Our production in February was 9.125 million barrels per day (bpd), in March it was 8.292 million bpd. In April we don't know yet, probably a little higher than March. The reason I gave you these numbers is to show you that the market is oversupplied," Naimi told reporters.
Saudi oil minister Ali al-Naimi, April 18, 2011

Does that statement make any sense?  Saudi production goes down in the face of rising demand, and prices skyrocket, and that shows the market is oversupplied???  Wouldn't prices have dropped drastically during that period if the market had been oversupplied?

Once again, it seems that Saudi oil production went from 9.125 MMBO/D in February, to 8.292 MMBO/D in March.  And remember (as we used to always tell the boss) February is always a "bad month" because it has fewer days.  Meanwhile, oil prices increased substantially in March.

You've got to ask yourself, why would Saudi oil minister al-Naimi issue this seemingly nonsensical press release?

Realize that the Saudis are our "partners" in trying to keep the world economy out of the ditch - they know it is not in their best interests to wreck the world economy, else demand for their product (oil) will go down.  So, they are not interested in $200 oil, or even $150 oil.  As the King said years ago, "You need the oil, we have the oil."  In exchange, we no doubt have security arrangements with them, and sell them billions in defense hardware.  (According to the WSJ today, Saudi Arabia had $41.3 billion in defense spending in 2009, compared to Iran's $8.6 billion in that year.)

So, back to the question.  If the "jig were up" - that is, if the onset of production rate decline was imminent, or even past tense - for the country generally believed to have the world's largest reserve capacity in terms of production rate, as well as the largest remaining reserves, then there might be one more ploy, one that might hold up for a few months (or not).  That would be to suggest that you were voluntarily cutting back production rate, rather than it happening despite your best efforts to increase it.  Or, put another way, that you were cutting the rate on purpose, rather than it dropping due to the inevitable decline in the production rate of a limited resource, aka Peak Oil.

One other thing:  Why would President Obama, in his "energy policy speech" of March 30, 2011, suddenly say we need to do more drilling for oil in the US, embrace shale gas and natural gas vehicles?  Previously President Obama only had room for renewables in his public speeches.  Continued oil and gas development, utilization of natural gas for transportation, conservation (of primary importance), renewables and sensible clean coal and nuclear make up the bulk of the often touted "all-of-the-above solution".  Often touted ... but not by President Obama!  Why the sudden shift in "policy"?  We already knew the answer, but hearing it from the President sent a chill up our spine, nonetheless.  It might be as close to a Presidential Peak Oil admission as we ever get - and likely as close as we really want.  It's time to stop petitioning, stop talking about why this or that won't work, and start focusing on what you can do, what your role is in the "all-of-the-above" solution.

Full press release here:   Saudi's slash output

Peak Oil question and answer ...

Back in January, an acquaintance asked some good questions about oil supply - "Why worry?" kindof stuff.  Questions about Peak Oil are valuable because they indicate where the communication is breaking down, where folks are having a hard time understanding the concepts.  In this case, my acquaintance is a highly-educated person who works in an alternative energy field - so one would think he would be biased towards believing the concepts, anyway.  That makes his questions that much more valuable, and it shows his honesty with himself.

i was just reading your blog. i know you are convinced by the peak oil thesis and find its consequences likely to be pronounced. you are also in the industry, a generally smart guy around town, so i ask you to straighten me out on this.

i'm not a doomer on this topic. in general, i'm not a doomer on any topic. i find our current moment the best in history, and the forces to accelerate that unprecendented. most of this follows from communication tech, most specifically, the web. the positive consequences of the web for me trump all other negatives around us. i could go on and on about all the pro good forces unleashed by the democratization of knowledge and communication access, but i'll resist. still, it is the biggie. like the brain that distinguished humans from all the more powerful and more numerous beasts that contended with our forebearers for food and real estate.

so back to the point.

on peak oil, i agree we may be at it, probably already past it, but i don't find the consequences anywhere near dire. in fact, i'm sad they are so soft and so slow. energy is currently way underpriced in relation to the value we get from it, and doubling its cost wouldn't do much. we already see many countries existing with more than 2x energy costs as the us, and they do fine. the world has not collapsed in any european country with $7/gal gasoline.

this is possible because no one needs to be inefficient with energy anymore. back when we had no choice, cheap energy was important. now i find it much less so. we can use a small amount of expensive energy to get the same industrial value that we used to get by cheap energy used inefficiently. our value produced per energy unit inserted has made lots of progess since 1900s england. so i welcome the increased price signal. i don't see doom in it.

at 2x the price point, so many other options become realistic that the market will make the others happen finally. we are overwhelmed with tech choices on the energy front. a price signal is most of what is needed. some political signal would help too, but is minor in the larger calculus.

problem is i think we're not going to get this price signal for a very long time. there are too many currently "unextractable" resources that become thinkable at just slightly higher prices. the canadian tar sands and venezuelen bitumen resources seem massive to me. if we get serious about extracting those, they seem large enough to blunt much of the peak decline. add into this the tremendous amount of nat gas we have everywhere, and our ability to reform it into near anything, and i'm not seeing the pinch.

on top of this add the proven human inability to know much about complex future predictions, and to date our "extractable" resources continuing to grow vastly beyond what was considered possible just a decade previous. putting all this together, i end up a non-believer in our going into cataclysmic fossil decline in any helpful manner.

admitedly the above is all handwaving. i don't have numbers on any of this. i have not read the literature closely and critically enough to really believe my assessment. i am a news consumer on this topic, thus lack full faith in my assessment. but nonetheless, that is my assessment.

this makes me sad, as i want to run out of oil on a faster slope. i think this transition is going to do massive good on near all fronts. fossil fuels are currently one of the most distorting financial, political and environmental forces on the planet. if i could change one thing in the world, it would be to not have this massively source dense and lucrative resource available. it tends to do bad things wherever it is found or overused.

of course i am partial to giving half of the planet their own personal scale power device, and let them run it off the already distributed fuel found around them. i think a pc of personal energy can deal with most of the power and products that we worry about in peak oil.

a multi-modal gasification machine can give you electricity, heat, cooling, shaft power, liquid fuels and biochar for ag. and it can do so on the waste that is already around us, sans the distorting impacts of a highly centralized and empowered fossil energy cartel.

yeah, we all have a few problems yet to solve before we have the fuel agnostic, fully automated, multi-modal gasification machine. but still, we see the solution is accessible. as are many others on other energy fronts.

so what's the problem? why are we worrying about fossil fuels so much? 

I am glad you outlined all those points, the thought process you are going through - that is helpful to all, I think. Perhaps you are just playing the "straight man", the "shill" here, and want some Peak Oil stuff for the group. Either way, my wife would have told you, "Don't ask him about Peak Oil, whatever you do!" So here goes, you asked for it!

I will segregate some of your points/questions:

Collapse/Doomer stuff
First, like you, I refuse to be a "doomer". (the link you included discusses this, as well). I am fascinated by man's ingenuity, and by the ingenuity of this group. "Our" group, I'll say, because I am proud to be a part of it, even though I have only made drawings of gasifiers, so far, and have only made a few contributions to the group. I had the blessing of meeting you, Mike L., Ron O., Bear, Jay, Markus, Ray M., Donna M. and others, in a short period of time. Then, by coincidence a couple of years ago I helped put together a coal bed methane project around the corner from where Wayne lives, so I dropped in to see him while I was over there,in November I guess it was. So, all this within a month or so. Wow. Blew me away. How many other homemade windturbine, alcohol, poor boy concentrating solar thermal, small steam, stirling, or whatever yahoo groups are there, out there??? We are a nation of tinkerers, and of course these groups transcend nationality. That gives me a lot of hope. On the other hand, we tinkerers are a bit "weird" (in a nice and important way) - we're not your normal folks. As a matter of fact, a guy told me that today, said I didn't like "normal" stuff like everyone else! (of course I was proud of that). But even though these groups now let us meet up in wonderful and synergistic ways, the fact is, there are far more consumers than there are tinkerers; we are a minority.

The reality is, most of our transportation, neighborhoods, cities, whatever were built on "cheap oil". Oil supplies 40 % of the US overall energy, and 60 % of that is imported. 70 % of the oil the US uses goes for transportation uses. Gasoline makes up 9 MMBO/D of the 20 MMBO/D (2007 high number) we use in the US. We're a lot different than Europe. And they are not necessarily smarter or even more forward-thinking - much of what they did was out of necessity or as a result of geography or politics. Europe is not exactly prospering right now, either. The unfortunate bottom-line is that neither natural gas, electric vehicles, biofuels, tar sands, coal to liquids, algae or any other fossil or renewable partial solution seen so far will replace liquid hydrocarbons in a timely enough fashion such that current lifestyles can be maintained as is; at the least, there will be disruption and hardship. As Dr. Hirsch et al put it, "you have zero chance of not getting burned by this." I would not say, either, that there is a zero chance of even an Olduvai Theory thing - anything can happen, collapse has happened before, will likely happen again. I don't have to accept it sitting down, though.

Even though we should have caught on to this a lot sooner, there is little we can do about the past. And it is so easy to lay blame, point the finger at corporations, politicians, the government, etc. But think of this - even you (until you finish reading this) don't believe there will be any problem! I estimate only about 25 % of the people have even heard of the Peak Oil concept, and only maybe 10 % (likely optimistic) understand what it is, or get the ramifications. Why? See this link:

What about the tar sands?
So, with respect to tar sands, you can't replace a large SIZE field of ancient AGE and excellent QUALITY (Middle East, US, etc) with even an enormous SIZE, new in AGE field of very poor (melt or dissolve it) QUALITY (Alberta tar sands). I call it the SAQ model, ie using SIZE, AGE and QUALITY of a field/reserve to normalize it for comparison, so to speak. See also this link, where on slide 10, "The SAQ Model - Example 1" it shows the downward revisions of earlier, rosey forecasts of increasing tar sand production rate (even in a substantially high price environment):

Consumption versus Reserves:
Replacing fossil fuels, or liquid fuels in particular, is a problem of SCALE, and TIME. Namely the scale of how much oil the world consumes, versus how much we discover - both currently and even since the 60's!

So, take a look at the Annual Discovery Curve:

This Annual Discovery Curve is representative of the RESERVES the world discovered, in each year, collectively. Notice it peaked in the 60's. Today, even with substantial advances in technology, we discover about 10 B bbls or less, annually. At 85 MMBO/D of consumption, we burn up 10 B bbls in ... 118 days. Yes, this is the issue. Far more is being used than discovered, and it has been that way for almost 50 years now ...

And even if we could through up nuclear plants all over, which of course we can't takes TIME, it would take a long time to manufacture enough electric cars and trucks to replace any significant portion of the fleet we all depend on. (and this doesn't address the fact that there are still electrical storage issues - cost, reliability and supply of lithium). So, SCALE, and TIME.

Read the Hirsch Report when you get a chance:

and read Hirsch et al's new book:

So, if the Peak has happened, why haven't we seen more effects?
Well, in my opinion, $147 oil provided the pin that pricked the destined to collapse consumption and housing and credit bubble, so I'd say you have seen effects. The magnitude of this recession is a SCALE issue, as well, and it is not well understood/reconciled. I used to worry about inflation. Then I finally began to understand that you couldn't reflate a maybe $500T bubble, without the same multiplying effects that you had previously. Namely, you can print up and hand out a few trillion, but that is small potatoes compared to the bubble. You can't reinflate the balloon, or even come close, without the multiplying effects of the previous goings on; you can give this money to banks, but unless you have the same funny business going on in all directions, you can't catch up to what it was. Which is not to say that we can't have some kind of "banana republic" inflation at some point, if we continue to destroy our currency. Enough on that.

Bottom line is that consumption dropped maybe 10 % from 2007 - 2009 (but not on gasoline). Doesn't seem like much, but what is also little understood is that "at the margins" is where the major commodity pricing spikes happen, ie the pricing is not stable there, not 10 %, 20 %, 30 % increases. Just a little too much supply, and if it is all marketed, the price tends to zero, in a "calculus sort of way". Likewise, not quite enough when you have to have it, and the price tends towards infinity. Oil supply is not fully elastic, anymore. And there are not elastic replacements that will work, "if we just had higher prices." (Dr. Webber at UT tells the joke about coal to liquids being priced at "oil price plus $10/barrel" forever, ie when oil prices go up, so does the cost of the CTL, it never becomes "economic". Like going to Joe's Crab Shack where there is a painted sign, "Free Crab Tomorrow", but tomorrow never comes. On the other hand, CTL will be important in an era where liquid fuels don't have to compete with oil prices, because we simply won't have enough oil and oil/gasoline/diesel will be rationed.)

The consensus at the ASPO meeting in Denver, in fall 2009 was that you'd see a series of whipsaws, where oil prices went up, shut down some portion of the economy/demand, then the economy declined as would prices, for a time. But ultimately the subsequent declines in prices would be smaller, over time, as depletion caught up, unless economic activity took on new, drastic lows.

We need to continue to develop oil and gas, or else the situation will be even worse. The deepwater hiatus is already baked in, will make matters worse. The right hand side of "Hubbert's Peak" anticipates "peddling faster for less", as we are doing with much of our oil industry efforts. If we don't then declines will be even worse, and Hubbert's Peak may become Hubbert's Cliff.. Meanwhile, we need to do more in terms of liquid fuels conservation (where we can have the biggest effect, the soonest). We really needed to get going on natural gas vehicle infrastructure and vehicles ... yesterday. And of course, for us weird mechanics, there is woodgas. I imagine we'll be less weird, everybody's friend, before long!

So there, you asked for it! My contribution, for now!

Conserve Baby Conserve,
Drill Baby Drill,

Follow-up Questions
nope, i'm not being a shill here. i really don't believe it, but don't really believe myself on this one either.

i'll go read the links with interest. you seem to see clear evidence of our discovery rate vs consumption have a meaningful collison ahead.

i have yet to be convinced here. i see discovery rate mostly a financial question. you know we've been predicting discovery depletion since 1910 or so. what we consider discoverable keeps changing profoundly. you know this. so you must see something new in these graphs that i don't yet.

the wildcards for me are.

1. tar sands
2. bitumen
3. deep sea drilling. like the entire ocean
4. natural gas
5. coal to liquids

not to say any of these are particularly good ideas. actually most of them are very bad. but they are going to get engaged when the price makes sense, which is likely soon.

now it is unfair to poo poo all the gtl tech as forever price + $10. these are not mysterious techs. used many times. we need to reinvent the industrial infrasture for current use, but the price point for this is little different than much petro tech. we'll do them just fine, but at terribly co2 cost.

the rate of infrastructure change doesn't scare me at all. when needed, we can change infrastructure radically in a few years. look at china for a recent example of what can be done in 10 years when it is imporatant. wwII. railroads, the internet. etc etc. govt command, market command, or war can do wonders fast. a decade is a near eternity when the need is clear and compelling.

any strong case peak scenario seems to me to play out over a couple decades at mininum. this is already half the life expectancy of most power infrastructure. just replacement cycle will deal with most of it. no?

08 for me showed speculation to have about doubled the "real" value of the commodity oil. that was fleeting. now we're back to a regular price rise with economic activity. the spike ramp in 08 was not the peak oil end scenario as we liked to entertain ourselves with back then. the end did not come. though it did somewhat for the speculative engines that created it. not sure how long that will last though.

the core of this is i can't answer or well understand the real flexibility we have in "discoverability". at 2x the price, i'm sure the world will do just fine without collapse. and at 2x the price in real demand, not speculative fluff, what is now reasonable to discover and extract?

isn't the claim that the tar sands and bitumen alone are each their own saudi arabia scale reserve?

nat gas costs 1/5 liquid per btu, given it is everywhere and barely worth not burning off in fields. so have so much nat gas at our disposal its depressing.

i think we're going to burn this planet to a crisp before we're anywhere near taxed on finding, buying and using fossil fuels.

thus i'm trying to get some numbers and assessements of these other resources. i'm not sure if my anecdotes have any substance.

i'll start with your paper cites tomorrow. thank you for them. 

Answers to Follow-up Questions

Discovery on a small scale is a financial issue. On the worldwide scale, it is ... physics - when you have found most all the big reserves.

Take the US as a poster child. The US peaked at about 10 MMBO/D in about 1970. (there is a slide on this in one of those links). Currently the US is doing just about half of that, just over 5 MMBO/D, despite substantially higher prices, substantial "access" and lots of technological advances in 3D seismic and horizontal drilling (hint: those things find and develop fields you can't find with 2D seismic or vertical wells. Why couldn't we find them before? Because they are smaller ...). The Bakken play in North Dakota is wonderful, and important to our nation. Today it is making about 350,000 BO/D. That's a lot, but remember SCALE. It's small in the scheme of things. It will grow, but remember, one of the giants that typifies what us peak guys are worried about, ONE field, in Mexico, Cantarell, has declined from 2.1 MMBO/D in 2005 to less than 500,000 BO/D today. Repeat that across the world and try to replace those fields with tar sands or Bakken plays ... it's that SCALE thing.

Remember in school, in math, where you added curves together to get one curve? Well, do the reverse. Look at the countries that have peaked (most of them, there is a slide in that same presentation). So, take away the countries that have peaked, where it is highly unlikely that they will ever produce at a greater rate. That doesn't leave many countries. No, we will never "run out" of oil, that is a common argument, albeit not really an argument. Oil will be dripping out, we will be producing it at some rate, forever. But that's not what is important. What's important is what kind of rate can you get it out of the ground, compared to the world's demand for it. And RATE is not arbitrary. The available RATE is dependent on the given RESERVE's SIZE, AGE and QUALITY. As in one of those links.

It would be hard to find a bigger "bull" on natural gas. It is a wonderful transition fuel, and one that will be around for a long time. We should be building vehicles and manufacturing facilities and infrastructure at warp speed (while we cut down on vehicles, add mass transit retrofits, at the same time). Although the government really shouldn't be doing it in the first plaace, if we are going to spend TARP or QE money, it should be spent on infrastructure or manufacturing, thereby creating jobs, thereby having a chance at getting us out of this mess. These are the things that have multiplying effects, not just giving the money to the bankers.

See the slide on tar sands projected production rates. These are the numbers from the "Canadian tar sands board", not someone who is anti-tar sands. It's that RATE thing.

I respect those who are concerned about global warming. To what extent is it man made versus natural? It is a modeling problem that is infinitely more complex than peak oil. We know that the climate has changed dramatically, and over fairly short geologic time, prior to industrialization. I suspect our great energy source, the sun, and the wobbles and movements of Earth, Sun, and more have a great impact. Mike L. might vote for warming, about now.

Exogenous events as "game changers", things like war as accelerants for change? That will do it, all right. But that's not what you would call "smooth, gradual, painless transition". We have not really had a war that has disturbed our lifestyles on a large scale since WWII. Pick up a copy of The Fourth Turning when you get a chance.

Comments on Macondo BOP's

Last month a report was issued regarding the BOP's on the ill-fated BP Macondo well.  One commenter noted that BP was faulting the BOP's, and went on to liken BOP's to the "rear guard" in a war zone:

Itsy bitsy problem doomed BP's well

The war zone analogy is a decent one for the handling of a difficult well. However, if you goof up your tanks, your troops and your artillery, and wait until the enemy is 100 yards away to call the rear guard ... you can guess the outcome.

A parachute might be an analogy for a blowout preventer. Although you function test both and check them regularly, you don't want to get yourself into an emergency situation where you have to use them. That is "Job One" you might say, namely staying out of that situation. Further, if you have to use them, you need to use them early. Waiting, and attempting to close a well flowing at a high rate could be likened to trying to open your parachute at 100 feet.

So, what are the tanks, troops and artillery in drilling and completing a well? There are many, and in drilling a well, you can "pull the plug on the war" at any time if you are prepared and do it soon enough. Among other things, you design your casing/hole size such that there is enough cement sheath to create effective cement isolation, which also requires the proper cement slurry and centralizing the casing in the hole. Then after the cement job - on a difficult, high pressure well - you stay "on guard" for "gas flow after cementing", ie when gas flows in due to the setting of the cement's removal of hydrostatic pressure - before the cement has set enough to contain it. Then you test your liner top, and you take action to fix any problem. Then you make good decisions about displacing the pressure controlling mud out of the well. Then if you decide to do that, you make sure you have a way to keep track of the mud coming out, versus the seawater going in, to make sure that the well is not "coming in". If the well starts to come in, or flow, you close the blowout preventer immediately and begin circulating the mud back in, then fix the problem that allowed the well to flow. You don't wait until oil and gas are seen at the surface to shut the well in; by that time, it may be too late - you're opening your parachute at 100'. Finally, and most importantly, you have a highly experienced, sufficiently rested person (one person) in charge at all times. All of the above are "standard operating procedures" in any well control manual. These procedures were developed beginning, say, in the 1950's. (The above is just an example, and it is only coincidental if it resembles some of what might have occurred on the Macondo well.)